RBI rate hike: What it means for loans, deposits and markets
Impact on markets
Theoretically, higher interest rates are bad for both equity and bond markets. The logic is that higher interest rates raise the cost of money, leaving less money available to invest in stocks. However, currently, there are other overwhelming factors. Foreign portfolio investors (FPIs) have pulled out big time. Higher-yielding bonds abroad, particularly in the US, are an option for FPIs, apart from emerging market equity. However, there is buying support from domestic institutional investors (DIIs), particularly through mutual fund systematic investment plans (SIPs). SIP inflows are concentrated more in small- and mid-cap funds, while FPIs have been selling more large-cap stocks. On balance, higher interest rates are unlikely to have much incremental impact on the current market dynamics.
