Investing Basics

Impact of Interest Rate or Repo Rate Changes on the Stock Market

Interest rates are set by central banks all over the world. These interest rates are called as repo rates. For example, In India, Reserve Bank of India sets the repo rates & In USA, Federal Reserve sets the repo rates.

impact of change in interest rates on stocks
Repo rate is the rate at which central banks, like RBI or FED, lends to other banks.

The stock market generally has an inverse relationship with interest rates, meaning When rates rise, stocks tend to fall. & when rates fall, stocks rise.

Many investors believe this theory, which is somewhat accurate, but statistics show that not every segment of the market reacts in the same way.

For example, When interest rates rise, investors in technology and energy stocks become less patient and shift their money to other sectors. As a result, these sectors suffer when interest rates rise, whereas financial stocks such as banks, insurance companies, and asset managers benefit the most when interest rates rise. This is because banks can charge higher interest rates for their lending products.

If you try to find data showing a correlation between rising rates and falling markets, you might be disappointed.

The National Stock Exchange recently analyzed Nifty 50 stock, & the chart — illustrates that during these long-term periods, the stock market indexes only declined during three rate hike cycles.

Changes in interest rates can cause volatility in the stock market and impact costs for businesses.

As a general rule of thumb, When rates rise, stocks tend to fall ,& when rates fall, stocks rise. But there is no guarantee as to how the market will react to any given interest rate change.

What should a retail investor do when interest rates or repo rates change?

In that case "If you've found a long-term investment strategy you believe in, continue to invest, — and remain invested, — regardless of what happens in the short term,".

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