Inflation, Interest Rates And Equity Markets

The current inflation levels that are at a multi-decade high are causing lot of worries for global equity investors. It is inflation levels and the fear of rising inflation that remains a key risk for the equity markets in FY23. For long-term investors it is worth studying the impact of inflation and interest rates on equity prices. Yogesh Supekar explains the trend while also highlighting which sector stands to gain the most from such dynamic market changes

- Yogesh Supekar

The equity market, it is often said, is one of the most sensitive markets of all. Most sensitive meaning every major event, whether economic, geopolitical, or natural calamity, has the potential to impact the equity markets across the globe. Also, equity markets tend to get volatile owing to rising commodity prices and asset valuations as well. Similarly, rising inflation, one of the most important macro economic factors, has a telling impact on the fortunes of the equity market. At least that is what leading economists and experts would like to communicate to the investing world.

After all it is only logical to connect the dots and explain how bad rising inflation and interest rates can be to the cash flows generated by the corporate world. The impact is directly on the bottom line and when the cost of money is too high for too long, the business expansion plan gets hit, which in turn starts impacting the economic activity and results in lower GDP growth over a period of time. Sentiments turn sour and the animal spirits vanish. It is the unwarranted consequences of rising inflation and asset prices that worry most policy-makers. Sustained levels of inflation if not addressed immediately and deftly can lead to an everlasting impact on the economy and usually impacts the livelihood and wellbeing of the population residing in the country suffering from such a macroeconomic problem.