Central Bank Interest Rate
Praveen Dubey (SEBI Registered RA)
SP RESEARCHVIA PVT. LTD. (INH000015808)
The Relationship Between Interest Rates and Stock Prices
Interest rates are the gravity of the financial markets. When central banks adjust interest rates, they change the discount factor for all future corporate cash flows, shifting stock valuations globally.
Why do stock prices fall when central banks raise interest rates?
Higher interest rates increase borrowing costs for businesses and consumers, which lowers corporate profits. Additionally, higher rates raise the risk-free rate of return, making bonds more attractive and lowering the present value of future stock earnings in valuation models.
Impact on High-Growth Stocks
Growth stocks, such as technology companies, are highly sensitive to interest rates because their valuations rely heavily on earnings projected far into the future. A rate hike discounts those distant earnings more aggressively, leading to larger price corrections.
Written by Praveen Dubey
Chief Research Analyst | SEBI Reg: INH000015808
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