Business Standard

Business Cycles

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BUSINESS STANDARD

The links between inflation, interest rates, stocks and bonds are well-established. It all revolves around the business cycle. At rock-bottom, when growth and inflation are both low, so is the demand for credit. Banks and lenders drop rates to get any return on money that would otherwise lie idle.

Businesses are then tempted to finance expansions because of cheap cash. Consumers are also tempted into buying. Investors start betting on stocks because returns from debt drop. Secondary bond market prices rise as yields drop to match lower rates.

As the economy moves from neutral into first and second gear, debt and equity investors all make money. Cheap financing helps growth go into second and third gear and then into fourth. Credit demand rises along with the expansion.

 

As credit offtake rises, so do rates. Once expansion has gained momentum, there will be credit offtake at higher rates. Business confidence is high

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First Published: Aug 03 2002 | 12:00 AM IST

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