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Protect your stocks from rate spikes

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: In its attempt to contain the monster that eats into our savings, the Reserve Bank of India (RBI) has raised interest rates five times since March this year. Taking the cue, banks too have followed suit and raised interest rates just a few days ago. Last week, in its policy review, the central bank left rates unchanged, merely reducing the SLR to 24% from 25%.

However, this is certainly not the end of the taming of inflation story. “We are in a rising interest rate scenario and there is a consensus amongst market players that the RBI will hike rates in January ,” says Sadanand Shetty, vice-president and senior fund manager (equity), Taurus Mutual Fund.

So what does this rising interest rate mean for the stock market investors? And why do money market participants bet on further rate hikes? As long as the inflation doesn’t show signs of easing, the central bank has no option but to hike rates. This is because when interest rates are low, there are more borrowers willing to take loans. This means more money in the system and higher inflation . To reduce the chance of inflation, the central bank raises key interest rates, following which banks too hike rates. The opposite is also true. For example, when the economy exhibits low growth or in times of recession, central banks across the globe lower interest rates which, in turn, forces banks to reduce interest rates.

Consumer Woes :

Rising interest rates have an immediate impact on your monthly budget. You grocery bills will be the first item to show the strain. And, if you have an outstanding floating-rate housing loan, the rise may hurt you more. For example, let’s assume you have an EMI of . 28,951 for a . 30-lakh home loan at 10% interest for 20 years. However, if the interest rate moves to 12%, the EMI would go up to . 33,033.

Most people assume that the increase in EMIs would be offset by higher interest rates that they earn on your deposits. However, it’s not so simple, as most of the time rising interest rates are usually accompanied with an even higher rate of inflation, thereby reducing an individual’s purchasing power. Those who already have loans will have less disposable income as they will have to spend more on interest payments . Therefore, consumption patterns, in general, will see a contraction.

Read the full article from the Economic Times

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