Investment community tend to be obsessed with interest rates and for a good reason. Higher interest rates signify enhanced running costs directly affecting cash flows from operations and dampens demand for goods services in the economy.
Rationally, this should negatively affect broader equity markets. However, historical data suggests otherwise.
Over last 22 years, correlation between 10 Year Govt bond yields and Nifty 500 Index stands weak at -0.1. Hike in overnight borrowing rates has never in the past impacted equity returns negatively. This could be from the fact that rate hikes happen when the economy is doing well and demand for goods is robust (virtuous cycle). A small change in the interest cost thus has very little impact on the overall profitability of the companies.
Thus, any correction in equity markets as a knee jerk reaction to announcements could be a good entry point for long term investors.
Appending historical instances where interest rates went up and its effect on Indian Equity markets.
