Stock Market · Currency, Commodity & GSec

Interest rate cycles

Interest rates don't move in straight lines. They move in cycles driven by inflation and economic growth. Understanding where we are in the rate cycle is the most important macro skill for any investor.

The four phases

1. Rising rates (monetary tightening): inflation high → central bank raises rates → economy slows → credit expensive

2. Peak rates: rates plateau at highs → inflation contained → growth slowing

3. Falling rates (monetary easing): economy slowing/recession → central bank cuts rates → credit cheaper

4. Trough rates: rates at lows → economy recovering → inflation returning → cycle begins again

What performs in each phase

Rising rates: Cash, short-term bonds, banks, energy, commodities perform well. Growth stocks, REITs, long-duration bonds suffer.

Falling rates: Long-duration bonds, growth stocks, real estate rally. Banks face margin pressure. Gold often does well.

> The most important skill: identify the rate cycle inflection point EARLY. Buy long-duration bonds when rates peak. Buy growth stocks when rate cuts begin.

India's rate cycle

RBI follows the repo rate (currently 6-6.5% range in 2025). Track RBI MPC (Monetary Policy Committee) meetings. 6 per year. The forward guidance from the MPC statement is more important than the rate decision itself.

RBI and the US Fed

RBI can't cut rates freely if the US Fed hasn't. Capital would flow out of India to the US for higher returns. India's rate cycle is partly constrained by the Fed's decisions.

Takeaway. Interest rates cycle between tightening and easing phases. Rising rates hurt growth stocks and bonds; help banks and cash. Falling rates benefit long bonds and growth stocks. Spotting the peak of the rate cycle early is the highest-value macro call.