InvestorQ : Will a rise in Fed rates see pressure on Indian valuations and why?
Mahima Roy made post

Will a rise in Fed rates see pressure on Indian valuations and why?

Answer
user profile image
Mary Joseph answered.
2 years ago


This is a slightly more difficult one. One of the reasons many companies in India have enjoyed high P/E ratios despite slow growth is the low interest rates. A company value is a function of two key factors viz. future earnings growth and the discounting factor. Even if growth stagnates the cost of capital goes down when rates are falling. That is exactly what has happened since 2008. A combination of too much liquidity and low rates has enhanced equity value even though growth has not been great. With a rate hike, bond yields will move upwards and the cost of capital will also go up resulting in lower P/E ratios. This can have a fairly large impact on stock prices, especially sectors that are quoting at high P/E ratios.