What is the relationship between interest rate, equity, debt, gold and real estate?

There comes a time in our life when knowing about money becomes a necessity rather than the option. Everyone is not from the finance background right. No worries, you are at the right place to understand things in a crystal-clear manner…

If we need some money to buy a new home or a vehicle, our eyes turn towards bank. What if banks need some money? Whom should they ask for? Will they come to you? Haha!! Certainly not. Banks will ask money from RBI. As we pay interest to the bank, banks pay interest to the RBI. That interest rate is known as repo rate. In order to maintain the inflation rate, RBI modifies the repo rate.

How much return you will get if you keep your money in the savings account? Hardly 3 to 4% depending on the bank. If interest rates are even more reduced like in USA, will people still save their money in banks? No. Money will flow into different asset classes.

Equities will increase when interest rates go down because money will flow into the riskier assets as they do not get much return from the fixed instruments. Anyway, government support via policies and liquidity must be there in order to push the market.

Gold is inversely related with the interest rates as per theory. When the interest rates go up, gold price has to come down and vice versa. Looking through practical lens, gold depends on various factors like International price, Rupee & US Dollar exchange rate and the last but not least is tax that government asks to pay. Gold is said to be safe heaven and people will rush to buy in panic. The best example is corona virus period graph uptick in the first few months.  When everything becomes normal, then the prices stabilize.

Real-estate shoots up when interest rates come down and vice versa. It depends on various other factors like land value in that particular area, future growth of that specific town or city in which we are buying. Many big heads will turn their investments to real estate because only the registration cost and cost estimated according to the government will be paid as white money through transactions.

When everything doesn’t work, debt instruments will work. Debt instruments is good for short term duration if you ask me. For instance, if a person deploys his/her money in debt vehicles when the interest rate is lower. They have the risk of growing interest rate. Anyway, there are different types of debt instruments, we will discuss in the upcoming articles. There are many micro and macro-economic factors to consider before assuming the relationship between the financial instruments but everything comes under same umbrella i.e., rotation of money from one asset class to another asset class.