RISING RATES FALLING MARKETS

WHAT SHOULD YOU DO NOW?

- Arul Selvan, Karthik Anand Vijay, Udhayaprakash

'Interest rates are set to rise and the markets have started to fall’. If you have been following the markets lately, you would have probably come across this statement. For many investors, this confluence of economics and the stock market is difficult to understand. Why should the markets fall if interest rates rise? What if they keep on rising? Will the markets keep tumbling? Who is raising the rates and why now, when the markets were amidst a raging bull run? Why spoil the party?

In this no-nonsense story, we answer all your queries regarding interest rates, without getting into the minutiae of the dismal science that economics is known to be. So, if you have been anxious about the increased volatility lately, worry no more. With this essential guide, you will know exactly what to do and what not to.

Why have the world markets turned volatile?

For the past few weeks, markets have been volatile. A number of reasons are being given for this: overheated markets, profit-booking, tensions between Russia and Ukraine and, of course, rising interest rates. Central bankers around the world are planning to hike interest rates in their countries, so the markets have already started discounting that. Why should the markets fall when the rates rise? We will find out soon.

What are interest rates?

'Interest rate' may mean different things to different people. Broadly, you either earn interest or pay it. When you lend money, you earn it. When you borrow money, you pay it. For instance, if you have taken a home loan, you pay interest to the lending institution. On the other hand, as a bank depositor, you earn it on your deposits as your deposits are the money lent to the bank. So, when rates rise, interest-earners tend to benefit and interest-payers tend to lose.

Who sets them and how do they get transmitted?