Download Impact on Rising Interest Rates

Rising Interest Rates
A Short note on Impacts of it…
5/23/2017
Jyot Sandip Shukla
1
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
5/23/2017
Jyot Sandip Shukla
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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
5/23/2017
Jyot Sandip Shukla
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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)
5/23/2017
Jyot Sandip Shukla
4
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.
5/23/2017
Jyot Sandip Shukla
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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
5/23/2017
Jyot Sandip Shukla
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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.
5/23/2017
Jyot Sandip Shukla
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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
5/23/2017
Cost cutting pressure
by Wage cut or
Squeezing margins
Jyot Sandip Shukla
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»Thank You
5/23/2017
Jyot Sandip Shukla
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