See-saw battle between interest rate and market indices

Chennai, Dec 3 Is there a see-saw battle between the interest rates and the stock market indices? When one goes up, the other comes down.

Curiously, this time around there is a conundrum. When the interest rates are going up and also set to go up further, the stock market indices are touching new heights.

"It is true that the biggest enemy of equity markets is rising interest rates. This is the normal relationship. Rising interest rates lead to higher cost of funds and that eats into profitability especially in medium and small enterprises," Dr. Joseph Thomas, Head of Research, Emkay Wealth Management told .

Agreeing with was Jayant R. Pai, Chief Marketing Officer, PPFAS Mutual Fund who told : "This is an unarguable truism. Interest rates serve the same purpose as 'gravity' does. When they rise, they pull down earnings and valuations soften. Apart from factors intrinsic to the stock market, rising rates also increase the number of relatively safe fixed income options. This also serves to reduce flows into the stock market. The opposite transpires when rates fall and we have been experiencing this since 2009 or so."

A short-term exception to this rule is banks and financial institutions who have lending books with their lending rates rising faster than the deposit rates, said Thomas.

"So, they

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