5 Aug 2024
Contrary to popular belief, lower interest rates are not necessarily beneficial for the Indian economy. In fact, rising interest rates have historically proven to be advantageous for the stock prices of Indian companies, as evidenced by the correlation between Nifty 500 performance and 10-Year Bond Yields.
While lower interest rates are often beneficial for developed markets like the US, which are heavily oriented towards technology, pharmaceuticals, and FMCG sectors, the Indian economy thrives under rising interest rates up to a certain threshold, typically around 9-10%. Beyond that point, the adverse effects of rising interest rates also begin to impact India adversely.
For India, a country with a strong manufacturing base, rising interest rates and inflation often indicate a healthy economic environment. This is because higher commodity prices, driven by increased demand, benefit manufacturing businesses and, in turn, boost stock prices.
Although there might be short-term deviations in the link between interest rates and the Nifty 500, the long-term correlation is undeniable, emphasizing the positive impact of rising rates on Indian stock prices.